Stocks and Euro slide as European Central Bank sets interest rate hike looming

  • Wall Street stumbles on fears of rising CPI data
  • Europe receives signal of first ECB rate hike in a decade
  • The yen stabilized at its lowest level in 20 years against the dollar
  • Charts: global forex rates

NEW YORK (Reuters) – U.S. and European stocks fell while record euro zone yields hit an eight-year high on Thursday after the European Central Bank prepared to raise interest rates next month for the first time since 2011 and pending inflation data. Investors spooked.

While the ECB’s decision was widely expected, the possibility of a significant increase from September weighed on sentiment as the Eurozone economy struggles with slowing growth and rising inflation. Read more

Stocks fell on Wall Street, with the S&P 500 and Nasdaq down more than 2%, as the market awaits the release of the US Consumer Price Index for May on Friday.

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“CPI is a big number,” said Jack Abelin, chief investment officer at Cresset Asset Management LLC. “It’s funny that the employment report has been historically significant, but inflation is really taking center stage.”

For months, markets have focused on how quickly central banks can move to curb inflation. Investors now expect the Federal Reserve to raise interest rates by 50 basis points next week, especially if US CPI data confirms a higher inflation reading.

Abelin believes that inflation peaked in March, with prices for lumber and copper already declining.

But raising interest rates by the central bank may also slow economic growth. The European Central Bank said inflation will remain “unwelcomely high” for some time, and the White House predicted Friday’s data would also be high.

Markets are seeing the ECB’s policy rate peaking above 2% and threatening slower growth, Bill Papadakis, macroeconomic analyst at Lombard Odier, said.

“We believe this will make monetary policy restrictive, and we doubt that the eurozone economy can maintain such tight conditions, given the current challenges,” Papadakis said.

Joe Manimbo, chief market analyst at Western Union Business Solutions, noted that the RBA rose this week more than expected, while “the European Central Bank took a somewhat less hawkish tone and as a result, we saw the euro zigzag”. He described the gradual ECB rate increases as “disappointing for the euro bulls”.

The euro was down 0.93% to $1.0616 against the dollar, as the dollar index rose 0.73%. But bond yields across southern Europe rose sharply after the European Central Bank announced a series of future interest rate increases.

“It looks like the ECB is about six months behind the Fed, at least in terms of action and maybe the situation as well,” Abelin said.

With inflation in the Eurozone rising to 8.1%, the European Central Bank had already announced a series of moves, including ending its long-term asset purchase program at the end of June.

The European Central Bank outlined plans to raise interest rates by a quarter point next month and perhaps a half point again in September in its first move of 50 basis points in 22 years. Read more

The German 10-year government bond yield – the main proxy for European borrowing rates – rose to an eight-year high of 1.47%. Subsequently, the bonds changed little at 1.437%.

US 10-year Treasury yields rose 1.6 basis points to 3.046%.

The European Central Bank released new forecasts that raised inflation this year to 6.8% from 5.1% previously, and cut growth forecasts to 2.8% from 3.7% due to skyrocketing energy and food prices.

Inflation in the euro area has reached record levels

Concerns about inflation and its impact on the economy reduced risk appetite.

The pan-European STOXX 600 Index (.STOXX) fell 1.36% and the MSCI gauge of global stocks (.MIWD00000PUS) closed 2.02% lower.

On Wall Street, the Dow Jones Industrial Average (.DJI) lost 1.94%, the S&P 500 (.SPX) lost 2.38%, and the Nasdaq Composite (.IXIC) lost 2.75%.

Asian stocks fell overnight. MSCI’s largest index of Asia Pacific shares outside Japan (.MIAPJ0000PUS) lost 0.5%.

The Japanese yen fell to a 20-year low against the dollar at 134.55. The widening of policy divergence has put pressure on the yen, with the Bank of Japan remaining as one of the few global central banks yet to indicate higher rates.

Oil prices fell after parts of Shanghai imposed new lockdown measures. However, strong gains in refined products supported crude oil prices near three-month highs.

US crude futures fell 60 cents to settle at $121.51 a barrel, while Brent crude closed 51 cents lower at $123.07.

Gold prices, with rising Treasury yields and a firm dollar, has reduced the attractiveness of bullion.

US gold futures fell 0.2 percent to $1,852.80.

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Additional reporting by Herbert Lash and Mark Jones. Additional reporting by Andrew Galbraith in Shanghai. Editing by Jane Merriman, Lisa Shoemaker, Alex Richardson and David Gregorio

Our Standards: Thomson Reuters Trust Principles.

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